Tuesday, January 03, 2012

Economics 101 - The Great Lie

This topic is for something I call The Great Lie.

I call it this, because everyone in America, and much of the Western World, has been lied to about some basic facts of life. These facts concern an idea fundamental to Western thought in the Modern Tradition, and that is the idea of progress.

Basically, we're all told things will get better with time. Science advances, society becomes more progressive, and the economy grows, so your standard of living will be better than that of your parents, and that your children will have it better than you did.

Without going into the philosophical arguments for this, I want to point out one simple fact: since the early Clinton Administration, we've been lied to about the growth of the economy.
Growth is much lower than reported.
Source: http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

So, what does this graph show? Simply, it shows the old measure of GDP (Gross Domestic Product) in blue, vs. the new measure of GDP, in red. GDP is used to measure if the economy is growing or shrinking. Basically, the Clinton Admin changed the way GDP was measured, so that the economy looked better than it really was. 

What does this mean for you? It means for the last 20 years or so, (look at the blue line) the economy has been declining, and in recession for almost all of the 21st Century. This decline was hidden during the 1990s. The 'average' of the red graph is almost a straight line, showing constant growth, while the 'average' of the blue line shows a steady decline. The red line starts to give up after 2000 and the average can't hide the decline anymore, while the blue line continues the steady decline into negative growth.

So, in practical terms, things have been getting worse. But living with the belief that things get better, many people have had to rely on credit cards and refinancing their homes in order to MAINTAIN a standard of living from 20 years ago!

Don't believe the lies! The mainsteam media wants you to believe that the bubble and housing crisis was purely the result of people being too excited, and greedy, and wanting more and more. Yes, this is true for some people, but many others were living at the same standard they always did, not realizing it was getting harder and harder to maintain that standard.

Why didn't they know? Because a bunch of economists decided to change the methodology of economic measures.

Want to see another one? Here's inflation.
Inflation is much higher than reported.
Source: http://www.shadowstats.com/alternate_data/inflation-charts
What does this chart represent? It shows inflation, which is the change in prices over time. For example, something that cost $1.00 in 1990 now costs roughly $2.00.* Things get more expensive with time. Look at that graph! Using the old measure, (the blue line), inflation has been approaching 10% for the entire 21st Century.

What does this cart mean for you? Well, the Clinton Administration also changed the way inflation was measured. Before, they'd take a bunch of food, and things people typically need to live (called a basket of goods) and measure how much it cost. Then, each month, they'd compare the cost this month to the cost last month, and tell you how much more expensive things are. That's inflation. They were measuring changes in the cost of living.

But now, with changes in the methodology, they use several techniques to change the measured rate of inflation. I'll explain one of them here, called substitution.

In a free market, people choose how they spend their money. Economists believe that if something gets too expensive, you'll switch your buying habit and buy something else. So if butter gets too expensive, you'll buy margarine. If steak gets too expensive, you'll buy hamburger.

Well, this makes sense. It shows how people behave, and how much money they're spending, right? 

WRONG! While it may reflect consumer behavior, it's no longer measuring the cost of LIVING, now it's measuring the cost of SURVIVING. Making substitutions of better quality foods for lower quality foods means you're just surviving. There's a big difference. They actually changed what they're measuring, but didn't tell you.

There are other things they do, but this is a big one because it's easy to see how you're being lied to!

As the story goes:
A little before the French Revolution, Marie Antoinette, the queen of France, was told that the peasants couldn't afford to buy bread, because of the heavy taxation.
She callously replied, "Well, let them eat cake."
Soon after, the French Revolution began.
 Well, The System is telling the American people is exactly the same: can't afford butter? Eat margarine instead.

Want to learn more about basic Economics? 

John Williams' Shadow Government Statistics.

Chris Martenson's Economic Crash Course.

* I pulled this is off the top of my head for the sake of example. People in the know, please don't shoot me over the specific value of this number.

Economics 101 - The Money Problem

There's a problem with money, and no, it's not the root of all evil.

Money is called a fiat currency, because it's used in place of something of value.

In the old days, people traded goods. Sugar for meat, or horseshoes for people shoes. You made something, and you traded away your surplus for other goods you wanted.

Well, if you grew corn, and the cobbler didn't like corn, you were out of luck...you couldn't get shoes. So, you'd have to trade corn with someone who had what the cobbler wanted, so you could trade that with the cobbler instead.

So, we switched to gold and silver, since everyone agreed that they had value. But gold gets heavy, so after awhile, we switched to pieces of paper that represent the gold or silver. 1 piece of paper can mean 1 cob of corn, or one shoe, or whatever. This is the purpose of money...to make trading easier than trading the things themselves.

But in our modern world, the money has been taken control of in two fundamentally corrupt ways. Compound interest-bearing debt, and the creation of money from nothing. Let me explain:

Let's imagine that we're going to create a new society. Let's make our society 10 people, and each person needs 10 pieces of paper to swap with other people so we can do trade.

But in this society, we can't just make the paper. We're forced to BORROW the paper from a central bank. Where do they get it? The same place anyone would. They print it FROM THIN AIR. Now, we have to go into debt to get that paper, and pay the debt back, with interest.

So we borrow $100 for our society, at 10% interest, and we'll pay it back next year. But when it comes time to pay it back, we owe the bank $110! That's more money than exists in our entire society! We pay back the original $100, but still owe $10 to the bank. AND our society has no money again! So we borrow $110 this time, and give $10 to the bank (for what we owed them) and keep the $100 for our society to use this year.

At the end of the second year, we owe the bank the original $110 (remember, we gave them back $10 instantly and kept $100 for our society), plus $11 in interest for the loan. So we have even more debt! Now we owe the bank $121 for the $100 in our society!

But of course, we only have $100, so we need to borrow the extra $21, just to pay them back. And we need $100 again for this year. It's not hard to see how the Central Bank can come to own and rule a country very quickly using this system.

So, there are two equally important, corrupted aspects of money supply:

Eliminate Interest-Incurring Currency
Earning interest for pieces of paper that say IOU is just plain WRONG. It's the ultimate business, and totally unethical. Government needs to take control of the issuance of money, and make it free for us to use (i.e. there's no cost associated with creating it). So money is a public service provided by the government, and no profit is made from the creation of money. No interest-bearing money creation means no ponzi scheme, and no built-in collapse.

Responsible Control of the Supply of Currency
The amount of money in system effects how well the system can do business. Too much money, and prices go up, and bubbles form. Too little money, and recession kicks in, because nobody can get the money (IOUs) they need to engage in trade. If it gets really bad, they start to barter, but that's the whole reason money was created in the first place...to make barter unnecessary. So the amount of money is very important to make sure the economy runs smoothly. Central Banks create boom/bust cycles by controlling the amount of money in the system.

Many people believe in the gold standard because they believe nobody can be trusted with creating money from nothing. It's too great a power. If you can print money from thin air, then you can do that to buy or control anything. By tying money to gold, you have some 'objective' way of controlling how much money is created. This is a separate debate.

One last thing about money in the US:

The US dollar is the "Reserve Currency". Basically this means that the US forced the world to use its money to buy and sell oil. This means the Federal Reserve can print lots of money to fight wars, pacify its citizens, and buy anything it wants, without making the money worthless. Countries are forced to buy US dollars to buy oil, or other goods. This creates additional demand, and keeps the US dollar stronger than it would otherwise be.

Want to learn more about Money and Economics? 

The Money Fix - A Documentary on Monetary Reform.

Chris Martenson's Economic Crash Course.